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FINANCIAL MANAGEMENT
Dr. Pham Thi Thuy Hang
Financial Management
Chapter 1.
Chapter 3.
Overview of finance Chapter 2. Time
Financial statement
and financial value of money
analysis
management
Chapter 5. Capital Chapter 6. Long-
Chapter 4.
structure decision term investment
Financial planning
and cost of capital decisions
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Chapter 1. Overview of finance and financial
management
1.1. Overview of 1.2. Overview of
finance and corporate financial
corporate finance management
1.3. Factors
influencing
corporate financial
management
1.1. Overview of finance and corporate
finance
Financial
Finance Management
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Finance
Finance is defined by Webster’s Dictionary as “the system
that includes the circulation of money, the granting of credit,
the making of investments, and the provision of banking
facilities.”
Eugene F. Brigham, JoeL F. Houston (2019), Fundamentals of
financial management, fifteenth edition, Cengage Learning
AREAS OF FINANCE
Financial Capital
management markets Investments.
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Financial management
• Financial management, also called corporate finance, focuses on
decisions relating to how much and what types of assets to
acquire, how to raise the capital needed to purchase assets, and
how to run the firm so as to maximize its value.
Capital markets
• Capital markets relate to the markets where
interest rates, along with stock and bond prices,
are determined.
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Investments
Investments relate to decisions concerning stocks and bonds and
include a number of activities:
• (1) Security analysis deals with finding the proper values of
individual securities (i.e., stocks and bonds).
• (2) Portfolio theory deals with the best way to structure portfolios,
or “baskets,” of stocks and bonds. Rational investors want to hold
diversified portfolios in order to limit risks, so choosing a properly
balanced portfolio is an important issue for any investor.
• (3) Market analysis deals with the issue of whether stock and
bond markets at any given time are “too high,” “too low,” or “about
right.”
1.2. Overview of corporate financial management
What is Financial Management?
Imagine that you were to start your own business. No matter what type you started, you
would have to answer the following three questions in some form or another:
1. What long-term investments should you take on? That is, what
lines of business will you be in and what sorts of buildings,
machinery, and equipment will you need?
2. Where will you get the long-term financing to pay for your
investment? Will you bring in other owners or will you borrow the
money?
3. How will you manage your everyday financial activities such
as collecting from customers and paying suppliers?
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Corporate finance (financial
management), broadly speaking, is
the study of ways to answer these
three questions.
The Financial Manager
A striking feature of large corporations is that the owners (the
stockholders) are usually not directly involved in making
business decisions, particularly on a day-to-day basis.
Instead, the corporation employs managers to represent the
owners’ interests and make decisions on their behalf. In a
large corporation, the financial manager would be in charge of
answering the three questions we raised in the preceding
section.
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FIGURE 1.1
A Sample Simplified
Organizational Chart
Financial Management Decision
Capital Capital Working Capital
Budgeting Structure Management
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Capital • The first question concerns the
firm’s long-term investments.
Budgeting • The process of planning and
managing a firm’s long-term
investments is called capital
budgeting
In capital budgeting, the financial
manager tries to identify
investment opportunities that are
worth more to the firm than they
cost to acquire.
Loosely speaking, this means that
the value of the cash flow
generated by an asset exceeds
the cost of that asset.
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For example,
• Walmart decides whether to open another store
would be an important capital budgeting
decision.
• Oracle or Microsoft, the decision to develop and
market a new spreadsheet program would be a
major capital budgeting decision.
• Some decisions, such as what type of computer
system to purchase, might not depend so much on a
particular line of business.
• The second question for the financial
Capital manager concerns ways in which the firm
obtains and manages the long-term
Structure financing it needs to support its long-term
investments.
• A firm’s capital structure (or financial
structure) is the specific mixture of long-
term debt and equity the firm uses to
finance its operations.
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The financial manager has two
concerns in this area.
• First, how much should the firm
borrow? That is, what mixture of
debt and equity is best?
• Second, what are the least
expensive sources of funds for
the firm?
• working capital refers to a firm’s short-term
Working assets, such as inventory, and its short-
term liabilities, such as money owed to
Capital suppliers.
Management • Managing the firm’s working capital is a
day-to-day activity that ensures that the
firm has sufficient resources to continue its
operations and avoid costly interruptions.
This involves a number of activities related
to the firm’s receipt and disbursement of
cash.
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Some questions about working capital that must
be answered are the following:
• (1) How much cash and inventory should we
keep on hand?
• (2) Should we sell on credit? If so, what terms
will we offer, and to whom will we extend them?
• (3) How will we obtain any needed short-term
financing? Will we purchase on credit, or will
we borrow in the short term and pay cash? If
we borrow in the short term, how and where
should we do it? These are just a small sample
of the issues that arise in managing a firm’s
working capital.
Concept Questions
▪ What is the Capital budgeting decision?
▪ What do you call the specific mixture of long-term
debt and equity that a firm chooses to use?
▪ Into what category of financial management does
cash management fall?
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1.3. Factors influencing corporate financial
management
Legal form Industry
Business Financial
environment system
Sole proprietorship
Form of Partnership
business
organization Corporation
A corporation by Another
Name
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Sole proprietorship
• is a business owned by one person
Sole proprietorship
• This is the simplest type of business to start and is the least
regulated form of organization
• Good news: The owner of a sole proprietorship keeps all the
profits.
• Bad news: the owner has unlimited liability for business debts
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Unlimited liability
• This means that creditors can look beyond
business assets to the proprietor’s personal
assets for payment.
• Similarly, there is no distinction between
personal and business income, so all business
income is taxed as personal income.
Sole proprietorship
• The life of a sole proprietorship is limited to the
owner’s life span, and the amount of equity
that can be raised is limited to the amount of
the proprietor’s personal wealth.
→the business is unable to exploit new
opportunities because of insufficient capital.
• Ownership of a sole proprietorship may be
difficult to transfer because this transfer
requires the sale of the entire business to a
new owner.
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Partnership
• A partnership is similar to a
proprietorship except that
there are two or more owners
(partners).
• In a general partnership, all the partners share in gains or losses, and all
have unlimited liability for all partnership debts, not just some particular
share.
• In a limited partnership, one or more general partners will run the
business and have unlimited liability, but there will be one or more
limited partners who will not actively participate in the business. A limited
partner’s liability for business debts is limited to the amount that partner
contributes to the partnership.
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• Partnerships based on a relatively
informal agreement are easy and
inexpensive to form.
• General partners have unlimited
liability for partnership debts, and
the partnership terminates when a
general partner wishes to sell out
or dies.
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• All income is taxed as personal income to
the partners, and the amount of equity that
can be raised is limited to the partners’
combined wealth.
• Ownership of a general partnership is not
easily transferred because a transfer
requires that a new partnership be formed.
• A limited partner’s interest can be sold
without dissolving the partnership, but
finding a buyer may be difficult.
• unlimited liability for
business debts on the
part of the owners,
• limited life of the
business,
• difficulty of transferring
ownership.
Disadvantages of sole
proprietorships and partnerships
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Corporation
Corporation
• A business is created as a distinct legal entity
composed of one or more individuals or
entities.
• A corporation is a legal “person,” separate and
distinct from its owners, and it has many of the
rights, duties, and privileges of an actual
person. Corporations can borrow money and
own property, can sue and be sued, and can
enter into contracts.
• A corporation can even be a general partner or
a limited partner in a partnership, and a
corporation can own stock in another
corporation.
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• In a large corporation, the stockholders
and the managers are usually separate
groups.
• The stockholders elect the board of
directors, who then select the managers.
• Managers are charged with running the
corporation’s affairs in the stockholders’
interests.
• In principle, stockholders control the
corporation because they elect the
directors.
• Ownership (represented by
shares of stock) can be readily
transferred, and the life of the
corporation is therefore not
limited
• The corporation borrows
Advantages money in its own name. As a
result, the stockholders in a
corporation have limited liability
for corporate debts. The most
they can lose is what they have
invested.
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• Because a corporation is a legal person,
it must pay taxes.
• Moreover, money paid out to
stockholders in the form of dividends is
Disadvantages taxed again as income to those
stockholders.
• This is double taxation, meaning that
corporate profits are taxed twice: at the
corporate level when they are earned
and again at the personal level when
they are paid out
• The goal of this entity is to
Limited liability operate and be taxed like a
partnership but retain limited
company liability for owners
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A corporation by another name
• Joint stock companies,
depending on the
• Public limited companies, specific nature of
• Or Limited liability companies the firm and the
country of origin.
Name
Country of Origin Type of Company
In Original Language Translated
Germany Aktiengesellschaft Corporation
Gesellschatt mít Limited liability
Germany
Beschrãkter Haftung company
United Kingdom Public limited company Public limited company
United Kingdom Limited Corporation
Naamloze
Netherlands Joint stock company
Vennootschap
Italy Società per Azioni Joint stock company
Sweden Aktiebolag Joint stock company
France Société Anonyme Joint stock company
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The Goal of Financial
Management
Possible goals
The Goal of Financial
Management
A more general goal
Sarbanes – Oxley
Possible goals
Survive Avoid financial Beat the Maximize sales Minimize costs
distress and competition or market share
bankruptcy
Maximize profits Maintain steady
earnings growth
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• It’s easy to increase market share or unit sales: All we have to do
is lower our prices or relax our credit terms.
• Similarly, we can always cut costs simply by doing away with things such
as research and development.
• We can avoid bankruptcy by never borrowing any money or
never taking any risks, and so on.
→ It’s not clear that any of these actions are in the
stockholders’ best interests
Profit maximization
would probably be
the most commonly
cited goal, but even
this is not a precise
objective.
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Do we mean profits this year? If
so, we should note that actions
such as deferring maintenance,
letting inventories run down, and
taking other short-run cost-
cutting measures will tend to
increase profits now, but these
activities aren’t necessarily
desirable.
• The goal of maximizing profits may refer to some sort
of “long-run” or “average” profits, but it’s still
unclear exactly what this means.
• First, do we mean something like accounting net income or
earnings per share?
• Second, what do we mean by the long run?
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The goals being listed here are all different,
but they tend to fall into two classes
The first group relates The second group
to profitability. • bankruptcy avoidance,
• sales, stability
• market share, • safety
• cost control →increasing • controlling risk.
profits.
The pursuit of profit normally involves some element of risk, so it isn’t
really possible to maximize both safety and profit.
The Goal of financial management
• The financial manager in a corporation makes decisions for the
stockholders of the firm.
• Instead of listing possible goals for the financial manager, we
really need to answer a more fundamental question:
From the stockholders’ point of view, what is a good financial
management decision?
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If we assume that stockholders buy stock
because they seek to gain financially, then
the answer is obvious:
Good decisions increase the value of the
stock, and poor decisions decrease the
value of the stock.
• It follows that the financial manager acts in the shareholders’ best
interests by making decisions that increase the value of the stock.
• The appropriate goal for the financial manager can thus be stated
quite easily:
The goal of financial management is to maximize the current
value per share of the existing stock.
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• The goal of maximizing the value of the stock avoids the
problems associated with the different goals we listed earlier.
• There is no ambiguity in the criterion, and there is no short-run
versus long-run issue.
• We explicitly mean that our goal is to maximize the current stock
value.
Why?
• The stockholders in a firm are residual owners. By this we mean
that they are entitled to only what is left after employees,
suppliers, and creditors (and anyone else with a legitimate claim)
are paid their due.
• If any of these groups go unpaid, the stockholders get nothing.
So, if the stockholders are winning in the sense that the leftover,
residual portion is growing, it must be true that everyone else is
winning also.
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A more general goal
• What is the appropriate goal when the firm has no traded stock?
• Corporations are certainly not the only type of business; and the stock in
many corporations rarely changes hands, so it’s difficult to say what the
value per share is at any given time.
• The total value of the stock in a corporation is simply equal to the value
of the owners’ equity
• Maximize the market value of the existing owners’ equity.
• Finally, our goal does not imply that the financial manager
should take illegal or unethical actions in the hope of
increasing the value of the equity in the firm. What we mean
is that the financial manager best serves the owners of the
business by identifying goods and services that add value to the
firm because they are desired and valued in the free
marketplace.
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The end
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